If Liberia is to experience a reversal in the sluggish performance of real GDP witnessed over the last three years, a new government emerging in 2018 will need to institute a comprehensive macroeconomic stabilization program. I draw this conclusion in response to the statements made by the Presidential Candidate of the ANC, Mr Alexander Cummings that should he win, his government would be able to expand the Liberian budget from $540 million to $2 billion in six years.
An intense debate has been ongoing within social media as to the merits of the assertions made by Mr. Cummings. In principle, I agree with the overall assessment provided by Economist Samuel Jackson in which he highlights the magnitude of the challenges. And by that he expresses a clear reservation to the statements made by Candidate Cummings.
On whether the statement has merit or not, I would like to first start by employing Mr. Jackson’s preconditioned period of 18-24 months. Thus, the success or failure of reform measures taken over this period will determine the sustainability of the economy to fend off longstanding structural weaknesses and exogenous shocks prior to the achievement of a $2 billion dollar budget goal in six years.
We agree that Liberia’s economy has been technically in a recession from the 2015/2016 budget cycle up to the present. The national budget experienced a critical breakdown declining from 6.7 percent in fiscal year 2015/2016 to 3.6 percent in fiscal year 2016/2017.
(Source: MFDP – Liberia Government)
The economy is characterized by a heavy reliance on the extraction of non-renewable natural resources such as iron ore and gold; as well as renewable natural resources such as rubber and oil palm. Such a resource-dependent economy or otherwise referred to as an “enclave economy” produces fewer jobs. Concomitantly, the 2014-2015 Ebola epidemic closely came on the heels of the slum in global prices for iron ore and rubber, Liberia’s two primary exports.
By the end of June 2016, the outbreak had further decimated an already fragile economy. The Sirleaf administration had admittedly failed to diversify the country’s productive output through the introduction of job-intensive industries that produce goods and services domestically.
As a result, we have witnessed longstanding current account deficits that have placed pressures on the exchange rate. The current account to GDP ratio which indicates the level of international competitiveness of an economy in broad terms shows for Liberia, a marked vacillation between 1979 and 2015, reaching an all-time high of 8.91 percent in 1981 and a record low of -65.50 percent in 2012.
(Source: Trading Economics: Data 1979 – 2015.)
A Need for Comprehensive Macroeconomic Stabilization As a precondition to realizing a sustained double-digit growth in infrastructure, energy expansion, and internet connectivity; the new government upon being installed in January 2018, would need to embark on a comprehensive macroeconomic stabilization program. A major reordering of fiscal, monetary, and trade policies must form the bedrock of such a stabilization program.
It should further involve a paradigm shift in redefining the dependent variables of the economy through an input-out modeling exercise.
Stabilization measures as such must include but not be limited to the following; a certain degree of expenditure-switching and expenditure-changing policies; instituting tax reforms that are aimed at incentivizing growth in entrepreneurship and the promotion of SMEs; restructuring of the revenue code such that highly-compensated personal income categories face equally high progressive income tax rates; instituting a certificate of incentive qualifying process by the National Investment Commission (NIC) to have government award Value Added Tax (VAT) breaks and import duty exemptions; allowing 100 percent repatriation of profits, dividends, and capital after tax for foreign companies that are prepared to invest in manufacturing and achieve certain benchmarks in the hiring and training of indigenous labor; have the Central Bank of Liberia (CBL) adopt an expansionary monetary policy that includes the lowering of the reserve requirement ratio and discount rate as an inducement to commercial banks to equally respond to credit demand; consider establishing a credit guarantee system for non-bank financial intermediaries to further expand micro-lending activities; explore the possibility of adopting quantitative easing strategies through the issuance of domestic bonds on international capital markets as a means of further raising additional financial resources; and expand the current Liberian Collateral Registry by introducing a warehouse financing system wherein inventory goods are systematically held in trust to serve as collateral against accessing various credit facilities.
A stabilization program being continuously retooled to meet certain benchmarks would not be an easy feat to achieve during the first 18-24 months. At the same time, it would require a government that is prepared to tackle corruption and cut wasteful spending with the aim of reducing the recurrent budget. The process would demand an unprecedented level of fiscal discipline and political will.
if the applications of these reform programs are successful and if through expenditure-switching and changing policies can be properly aligned, the overall goal would be that while monetary policy aims at promoting private-sector led investment growth; on the other hand, fiscal policy would be aimed at expanding the export base through an import substitution scheme that is tied to manufacturing and industrialization.
Given the above, could one say with all certainty through the adoption of a stabilization program, we would be able address some structural weaknesses and create the necessary domestic safeguards against external shocks? I believe that it clearly depends on the political will from the government which unfortunately seems so farfetched at the moment. With some economists forecasting that Liberia will reach a modest annual growth rate of 3.87 percent by 2020 (Source: Trading Economics: Data 2016 – 2020).
By that account, Mr. Cumming’s projection would appear less likely in six years. Obviously, the forecast only accounts for current economic conditions and may not have considered the structural changes that would be envisaged by an assertively reform-minded government. Given all determining factors of production, Liberia would still require many years of sectoral reforms to achieve a $2 billion dollar budget. Hence, this might not be a matter of whether we can, but rather when we can.
In concluding, I think that it would be wise that journalists and pundits follow through on the farreaching economic policy assertions made by candidates running for president so that they are prodded to provide the “how to measures” for the promises that they make during this 2017 electioneering season.
About the author:
William Ponder is a graduate of Boston University in Public Financial Management. He has had over 30 years of work experience as a public policy specialist and banker. He once served as an economic researcher with the National Bank of Liberia and has more recently worked in private banking in the United States. Mr. Ponder has published several articles major among which includes, “The Macroeconomic Challenges of Adopting a Realistic Exchange Rate Regime for Liberia” lead article in the Liberia Studies Journal, XXII 2, 1997 and “A Review of the Investment Incentive Code of Liberia”, The NBL Review Magazine.